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Senators Ask Who Got Money From A.I.G.

Eric Dinallo, second from right, New York State insurance chief, with an aide before the Senate panel. From left, Donald Kohn, Federal Reserve, and Scott Polakoff, Office of Thrift Supervision.Credit
Brendan Smialowski for The New York Times

WASHINGTON — Trying to draw a line in the sand, a Senate panel told the vice chairman of the Federal Reserve to identify all the parties made whole by the bailout of the American International Group or forget about coming back to ask Congress for more rescue money.

“You will get the biggest no you ever got,” Senator Jim Bunning, Republican of Kentucky, warned Donald L. Kohn, vice chairman of the Fed board of governors, in a hearing on Thursday. “I will hold up the bill.”

The hearing, led by Senator Christopher Dodd, Democrat of Connecticut and chairman of the Senate Banking Committee, was called to examine the regulatory patchwork that had allowed huge risks to build up at A.I.G. Since the insurance conglomerate’s near collapse in September, the federal government has committed $160 billion to keep it afloat.

Tens of billions of those dollars have merely passed through A.I.G. to its derivatives trading partners, shielding them from losses. The Fed has refused to provide the names of those financial institutions, and senator after senator, Democrat and Republican, said that was an outrage.

“We need to know who benefited, and we’re going to find out,” said Senator Richard C. Shelby, Republican of Alabama and the ranking member of the committee. “The Fed can be secretive for a while but not forever.”

Mr. Kohn said the Fed believed that the only hope of recovering the taxpayers’ money was to get A.I.G. back on its feet, doing business as usual — and that meant respecting its customers’ privacy.

“I would be very concerned that if we gave out the names, people wouldn’t want to do business with A.I.G.,” he said. But at Senator Dodd’s urging, he agreed to go back to the Fed and ask the other governors to reconsider.

“We’re in a new world, and new types of transparency are required,” he said.

Committee members also pressed regulators from the Office of Thrift Supervision and the New York State Insurance Department to concede that they were at least partly at fault for failing to prevent A.I.G.’s crisis.

The regulators said that while they might have been slow to step in, they had been hampered by regulatory rollbacks enacted by Congress a decade ago, provisions that kept them from seeing A.I.G. in its entirety and appreciating its risks.

After Congress knocked down the walls that once separated banking, insurance and capital-markets activity in 1999, these diverse businesses began knitting themselves together within A.I.G., creating unpredictable combinations. Regulators, still working in their narrow domains, did not keep up with the changes.

“The creation of financial supermarkets can have what I would call a knock-on effect,” said Eric R. Dinallo, the New York State insurance superintendent.

He said state insurance regulators had done a good job keeping A.I.G.’s insurance subsidiaries solvent. But then A.I.G.’s derivatives business — A.I.G. Financial Products, the purveyor of the now-notorious credit-default swaps — got into trouble. The financial products unit was not an insurance company and was beyond state purview, Mr. Dinallo said. But it was under the same umbrella with the insurance companies, and in the crisis, it threatened to strip the insurers’ capital away.

“Thank God, there are still some separations intact,” Mr. Dinallo said.

Mr. Shelby expressed doubts that A.I.G.’s state-regulated insurance companies were entirely innocent. He said they had engaged in a risky securities lending business and ended up needing $35 billion of the Fed’s bailout last fall.

“Are you trying to evade your responsibility?” he asked Mr. Dinallo. “You can claim here today that you have little responsibility for all of these problems?”

Mr. Dinallo said that it was true that the securities in the lending program were the property of A.I.G.’s insurance companies, but that the lending activity had been orchestrated by another part of A.I.G. — a special unit set up and controlled by A.I.G. the holding company. State regulators had no jurisdiction over the special unit, but it could layer big risks back onto the insurers, he said.

In any case, Mr. Dinallo said that the New York State Insurance Department spotted the problem in 2006 and began quietly working with A.I.G. to unwind the risky investments. But they ran out of time. Only about a quarter of the portfolio had been cleaned up by the time last September’s crisis struck.

Mr. Dinallo’s testimony contrasted with statements made by Scott M. Polakoff, acting director of the Office of Thrift Supervision. Mr. Polakoff readily acknowledged that his office was A.I.G.’s primary regulator. And he agreed that his agency had failed to head off the crisis, because it had not recognized the giant risks building up in A.I.G.’s swaps business.

A.I.G. came under the Office of Thrift Supervision because it bought a savings and loan in 1999. The conglomerate had assets of more than $1 trillion at its peak, and the savings and loan was worth only about $1 billion. So the transaction forced a guppy to regulate a whale.

Mr. Polakoff said one of the first things his office had had to do was identify the regulators of A.I.G. subsidiaries in more than 100 countries and start gathering information from them.

The more the office learned about A.I.G., he said, the more it found problems. It tried, with increasing urgency, to work with other regulators, with the A.I.G. corporate board and with the company’s auditor, PricewaterhouseCoopers. Eventually it was joined by the Securities and Exchange Commission and the Justice Department.